Focus, Focus

by Jeff Fischer(TMFJeff)

ALEXANDRIA, VA (May 27, 1999) -- The world seems intent on moving to 24-hour-a-day activity, whether it be all-day stock trading, online shopping, the ability to contact someone (e-mail, voicemail, cell phones), or the means to work day and night (with a laptop and phone line, work is always present wherever some go).

Today the Nasdaq Market announced that it'll increase trading hours for Nasdaq 100 stock -- which includes Intel (Nasdaq: INTC) -- by adding afternoon to evening hours. As much as we enjoy the convenience of the wired world, we, like Jerry Yang of Yahoo (Nasdaq: YHOO), will not be absorbed by it. A compact 24-hour, Web-surfing, quote machine will not find a home in our pocket. Instead, we want to steadily build wealth via disciplined, unhurried, Foolishly relaxed investing. It is the best way, if not the only way, to invest. So, we don't need increased trading hours.

We also don't need to invest in ten industries in hopes of hitting a few jackpots. Instead, we want to invest in a few high-quality industries that we understand and only hit jackpots, if you will. This is called focus investing, and we've talked about it since our inception. The Boring Port discusses it frequently, too, and they did again yesterday.

Like the marble columns that still stand in ancient Rome, alone and wind-weathered, the belief that a portfolio must hold 20 STOCKS in 15 INDUSTRIES in order to be fully diversified still lingers above today's investors with languid purpose. It simply isn't true. In fact, it is simply bad advice. It is advice given in order to create more trades. The more stocks owned by clients, the more full-service brokers collect in trading commissions.

Studies, as well as common sense, show that the opposite of extreme diversification is more rewarding. Ownership of a few high-quality companies will almost always result in higher returns than ownership of a mutual fund holding 100 companies. And a focused portfolio of five high-quality, well-understood companies has a much better chance to outperform than a portfolio holding 20 companies that are moderately understood. Commissions for the smaller portfolio are fewer, and the concentration of funds in high-quality businesses is more likely complete, not half-complete.

So, why not get to know ten industries closely and then invest?

Well, there is a reason that most industry analysts -- and there are some great ones, Wise cracks aside -- focus on only one or two industries during an entire career. It is because it is very difficult to learn an industry inside and out. It takes years. Even decades. This is why industry analysts are traditionally well paid, highly valued assets.

During ten years of investing, I've come to know only two industries well and two others moderately well. But only two well enough. They are pharmaceuticals and food and beverages. The other sector that I'm most comfortable with is online-based companies. The online industry, for lack of a better description, is so young, however, that everyone is still learning it. And even with century-old industries, there is always something more to know. Meanwhile, regarding industries outside my closer experience, I've really only studied companies extensively, such as Intel.

The rest of my life could be spent focused on pharmaceuticals and online-based businesses, for example, and these two would represent a complete career that wouldn't allow time to learn other industries. And attempting to learn new industries could prove detrimental, or at least not maximally beneficial, by eating time that could best be spent leveraging existing knowledge in other industries.

Dale put it this way yesterday in the Bore Port: in life, you typically focus on one career; you work to be the best you can at it. That is the way to career success, not chasing many careers and doing all halfheartedly. In relationships, you hopefully do the same: focus and engage each meaningful relationship well.

In Drip Port, we're focusing on a few industries. This will remain true. Right now, I don't believe that we'll ever own utilities, for example, because I don't believe that we can ever understand them well enough, and I don't see the return prospects as being attractive enough, comparatively, to pursue this industries at the expense of industries that I already understand.

And as much as we tried, one can't learn the oil industry well enough in six months to invest in it. We gave it a try. It could likely take years, though, to really know the industry. For point of reference, I'd been looking at our other industries for more than a few years before we bought our current holdings.

Most important right now is this: we admire our current holdings at least as much as anything we know -- anything we know beyond some surface knowledge -- on the stock market. We would rather continue to invest our dollars in our current holdings, at zero cost, than add other companies quickly that may not be as attractive, would increase costs, and thereby stand to dilute returns.

We will add more companies, I'm almost certain. Four -- with only three of them active -- is few. So a few more buys are likely. We will study industries for months again, too, but mainly to give everyone a foothold, some beginning knowledge, rather than to reach another buy. If we don't know an industry well at the start, we won't likely know it well enough to buy six months or even a year later.

In the meantime, to find new stocks, we are going to compare companies on our Interest List that reside in industries we know. We are going to compare Wrigley to Coca-Cola for a possible buy; Pfizer to Abbott Labs; and yes, Exxon and Mobil to others in the industry, because now that we've at least begun the study, perhaps in three to five years we will be ready to buy one of the oil stocks. We'll consider others, too.

We will also continue to develop our company Interest List and compare industry leaders. We'll continue to send money to our current holdings and we could be happy doing so, if the companies continue to lead, for years to come. I am interested in adding a few new companies, though; and most likely at least one this year. I have biases about which companies they might be -- I can't help that; it's based on past knowledge. But, as we said from the start, I want to reiterate that we're not in a hurry to buy new companies. We're in a slurry: the Foolish opposite of hurry. Typically, the more deliberately that we can invest, the better. The more focused we can be, the stronger.

I hope this answers some questions regarding our direction. Please visit the Drip Companies message board where I can answer other questions you might have.

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